City of Long Beach Memorandum Working Together to Serve Date: December 31, 2014 To: Perio H. West, city Manager 0-— From: John Gross, Director of Financial Management For: Mayor and Members of the City Council I Plan Subject: Strategy for the Tidelands Capital Budget and 5-Year Capi The Tidelands Capital Budget is funded entirely from oil revenues. The price of oil began to decline after July 2014 and has apparently not yet stabilized. On October 8, 2014, staff provided a memo to the City Council stating that the changing price of oil required a revised strategy for the Tidelands Capital Budget and the 5-year Capital Plan, and that a revised strategy would be presented to the City Council by the end of the year. This memo provides the proposed strategy for Tidelands Capital expenditures and provides preliminary information of the impact of the oil price on the Tidelands Operating Budget and the Uplands Oil Fund budget. In summary, the low price of oil has greatly reduced the oil revenue that the City'can rely on receiving. In addition, the unsettled oil markets make predictions of specific levels of oil revenue for the future to be very questionable. It is not clear that any new oil revenues will be available for Tidelands capital projects in the next few years. As a result, the revised strategy recommends that Tidelands capital projects be funded based on a City Council prioritized list of projects, and not from a preset budget that makes assumptions about oil revenue. With regard to the Uplands Oil Fund one-time monies, no one-time monies should be expected for FY 16, and, at present, it cannot be assumed that they will be available in the future. The operating budgets of both Tidelands and Uplands are expected to be impacted by the decline in the price of oil, although by less than the Tidelands Capital Budget has been impacted. The operating budgets will need to be further reviewed for possible adjustments that will occur in the first quarter of 2015. The FY 15 Tidelands Capital Budget and the 5-Year Capital Plan are based on an assumed price of oil of $100 per barrel Long Beach oil had been at about $100 per barrel for close to three years. The 2015 Tidelands Capital Budget and 5-Year capital plan assumed the price of oil would remain at least at $100 and identified projects that would be funded at that price. The operating budget is based on an assumed price of oil of at least $70 per barrel and the production costs and oil exploration levels that existed at the time the budget was prepared. The price of oil is currently at approximately $50 per barrel and production levels and exploration levels are changing. As a result, both the capital and operating budgets are impacted by the price of oil and the oil market as described below.Strategy for the Tidelands Capital Budget and 5-Year Capital Plan December 31, 2014 Page 2 Since the end of July, the price of oil has declined sharply and there is no indication that the price of oil will be increasing in the near term Alter the end of July 2014, the price of oil began to decline. As of mid-December the price of oil had declined from $100 per barrel, in July, to $50 per barrel. Key drivers for the lower price are low demand and high production by the OPEC nations, by non-OPEC producers, and by the United States. The change to the oil market is a reminder that the price of oil is unpredictable, While there is no current indication that the price of oil will increase in the foreseeable future to the budgeted $100 per barrel (for capital), the price of oil could increase at any time, it could continue to decline, or it could stabilize at some level. The Price of oil has shown frequent oscillations and occasional sharp drops. It dropped sharply in 2009. The price of oil was relatively stable for the last three years, and then began a sharp decline in mid-2014 with an uncertain future. Following is a chart showing the price of oil over the last 14 years (pricing in 2014 goes to 12/22/14). Wilmington Oil Price 2000-2014 $ per barrel 10 si20 100 seo sso 10 soo . 4 599 8 OO OE Oil revenues to Tidelands will decrease substantially, but how much remains uncertain In large part, the oil revenues the City receives in the Tidelands Fund depend on the price of oil. However, there are two other interrelated factors that also impact the revenue received by the City - the amount of oil produced (production) and production costs. Production costs include exploration and drilling costs, not just the immediate cost of extracting oil from the ground. These three factors are all impacted by the unpredictable oil market. Normally, Tidelands oil revenue increases when prices rise and revenue declines when prices drop, but in the short-term, the interplay among the three factors can causeStrategy for the Tidelands Capital Budget and 5-Year Capital Plan December 31, 2014 Page 3 the reverse to happen, e.g., Tidelands oi! revenue can fall for a time as the price of oil increases. In addition, the interplay of the factors impacting City oil revenue causes the oil revenue the City receives at a $70 price in the current oil market to be significantly different from the revenue the City received from a $70 price in the market that existed for recent previous budgets. Oil prices are likely to be significantly higher at some point in the future. However, it is not predictable that Tidelands oil revenue will substantially increase in the next few years. Most market participants do not predict substantial increases in the next few years. Regardless of the uncertainty, it is essential to provide a baseline revenue projection for purposes of developing the revised strategy for the Capital Budget and 5-Year Capital Plan. That is described in the following paragraph; but it is important to consider that the projection is based on the current market and, at some point, it is certain that the current market conditions will change. To understand what might happen to Tidelands oil revenues in FY15 and the future, based on cutrent market conditions, staff developed and reviewed a number of different multi-year revenue projection scenarios using various oil prices, and various possible production levels and production costs. All projections show a major drop in oil revenue compared to the assumptions on which the FY 16 Tidelands Capital Budget and 5-Year Capital Plan was based. There is a wide range of possible revenue outcomes given the uncertain and constantly changing market conditions and decisions. Staff looked at market conditions up to mid-December in making the assessment of which market conditions to use for a projection. The market conditions as of the end of November were used. That point in time is an apparent low point in projected revenue given the interplay of all factors impacting City revenue. That low point provides a reasonable and, hopefully, conservative basis for revenue projection. No additional oil revenues for capital projects will be available in the immediate future Based on the updated revenue projections, no new money for Tidelands capital projects is expected in FY 15 and the current market conditions do not project it for the future. Based on the updated revenue projection, all Tidelands cil revenue may be needed to support the Tidelands Operating Budget, which has a higher priority than the Capital Budget. At some point in the future, market conditions will change and oil revenue funding for capital projects is almost certain to be available. At this point in time, there is no indication of when that will be, but that does not necessarily mean it is far off in the future. The Operating Budget for the Tidelands Fund and for Uplands Oil Fund is discussed later in this memo. Substantial accumulated oil funds are available for capital projects Even though there may be no new oil money available for Tidelands capital projects for an unknown period of time, there is about $95 milion in a substantial amount of existing funding available. This includes approximately $73 million in funding available for capitalStrategy for the Tidelands Capital Budget and 5-Year Capital Plan December 31, 2014 Page 4 projects from oil revenue accumulated through FY 14. Most of the money has been allocated to projects, but many of the projects have not yet been started or are in early stages of work. Funding for these projects could be reassigned to projects with a higher priority, if the City Council wished to do so. In addition, there is about $22 million of unallocated funds available. Incomplete/Unconstructed projects total $232 million There is an estimated $232 millon in Tidelands capital projects that have previously been funded through the budget or planned over the next five years by the City Council and that, are incomplete or uncommitted for construction. These include such major projects as the last phases of the Alamitos Bay Marina Rebuild, several phases of the Seawalls, the Belmont Beach and Aquatics Center, the Rainbow Lagoon, Belmont Pier, the Pine Avenue Public Dock and many other smaller projects. As previously described, there is an estimated $95 million available for these $232 million in incomplete or unconstructed projects. Some of the cost estimates for these projects may be outdated, as they were often done before complete engineering and design, and do not include any cost inflation that, may have occurred since the estimate was done. Inflation on construction projects typically is 3 percent to 6 percent a year. The following chart summarizes that status. The negative $5 million for the FY 15 Budget represents the amount that must be reallocated to fund a restoration phase of the Colorado Lagoon that is required by the California Coastal Commission. Tidelands Capital Project Summary Incomplete/Unconstructed Projects and Potential Funding Reassignment (in millions of $) Capital Projects ‘SValue of | Estimated $ Incomplete or | That Could Uncommitted be Projects _| Reassigned Previously funded projects (through 2014) 79 78 FY15 Budget and Capital Plan (2015-2019) 153; ©) Funding from Funds Available 22 Total 232 5 The list of Tidelands capital projects that are incomplete or have not started construction is provided in Attachment A. The project list and the amounts shown for the available funding are preliminary. The information will be updated in the next few weeks.Strategy for the Tidelands Capital Budget and §-Year Capital Plan December 31, 2014 Page 5 Projects should be prioritized for funding The shortfall in current funding and the lack of certainty of when additional funding will become available, necessitate a new strategy for the Tidelands Capital Budget and §-Year Capital Pian. That strategy prioritizes the outstanding Tidelands capital projects and then assigns all currently available funding to those projects, in priority order, up to the funding level for each project as determined by the City Council. As additional oil revenues are received, the new funding is also assigned to projects in the same priority order. The prioritized list becomes the revised Tidelands Capital Plan. This strategy is a substantial improvement over a standard budget practice in this particular situation. Standard budget practice does not take into account the extreme uncertainty of the oil funding, nor does it allow for reprioritizing of projects based on the new information on oil revenues that is now available. Details of the proposed revised strategy follow. Proposed Strategy for the Tidelands Capital Budget and 5-Year Capital Plan 1. Tidelan | projects are prioritized by the City Council for determination of ming of funding + The projects to be prioritized include all City Council approved projects, including those budgeted, reserved, and in the 5-Year Capital Plan. + Prioritization will be based on criteria agreed upon by City Council (Attachment B provides a suggested list of criteria and the prioritization process), Projects may be broken into funding phases for priority setting purposes. Until the prioritization is in place, no Tidelands capital projects will be advanced to. a new phase, unless specifically authorized in the interim by the City Council. 2. Allfunding available for Tidelands capital projects is assigned in priority order * Funding includes monies previously assigned to projects but which can be reassigned. + Funding includes funds available. 3. Work on any new phase of a project continues only after full funding of the phase ‘occurs, based on the prioritized project list + The project (or project phase) is budgeted after funding occurs. Planning and preliminary work on design to position projects for the future construction will continue as an administrative cost from Tidelands operations. Major work on a project will typically not be done unless that work is funded as a priority project phase on the capital project list. 4. Funding projections and project prioritization are reviewed and updated during the annua! budget process and more often as appropriate * The price of oil and its impacts on oil revenue will be reviewed as part of the annual budget process and as often as necessary. * The priority list for Tidelands capital projects will be reviewed and updated during the annual budget process.Strategy for the Tidelands Capital Budget and 5-Year Capital Plan December 31, 2014 Page 6 This strategy addresses the expected reduction in oil revenue, reallocates to the City Council's top priorities both existing funds and any new oil funding, as received. The strategy works well when additional oil revenue becomes available and also if oil revenue is lower than projected. It is anticipated that a prioritized list of projects and associated funding can be developed before the end of the first quarter of 2015 so that projects that have City Counci’s priority can proceed The Tidelands operating budget is impacted and will be reviewed for reduction Even with all Tidelands oil money used to support the operating budget, an operating budget shortiall is anticipated beginning in FY 15. A very preliminary estimate of the shortfall could be on the order of $1 million to $2 million with a potentially bigger shortfall in FY 16. However, that projection is subject to material change as more information becomes available. Reductions to the operating budget until oil revenues increase is a good financial practice. However, if the operating shortfall is expected to be relatively short-term in nature, it could be partially funded by the temporary drawdown of Tidelands funds available. The Tidelands operating budget will be reviewed during the first quarter of 2015 for potential changes for both the FY 15 and FY 16 budgets. The Uplands Oil budget is also impacted and will be reviewed for reduction The decline in the price of oil also impacts the Uplands Oil Fund, but the impact is different from the impact on the Tidelands Fund. The Uplands Oii Fund derives about 50 percent of its oil related revenue from a fee on ail oil production costs in the Tidelands area. A drop in the price of oil only directly affects about half of the Uplands revenue. However, some reductions in Tidelands production costs have already occurred, and additional reductions are expected in the near future. Because the information needed for an Uplands Oil projection is still substantially changing, a projection of Uplands Oil revenue will be made in the first quarter of 2015. However, it is likely that at the least in FY 16, no one-time oil revenue will be available from Uplands Oil. It also appears likely that the transfer to the General Fund could be adversely impacted by several million dollars. Next Steps The recommended next steps are: 1. Staff presentation to the City Council of the proposed strategy for the Tidelands Capital Budget and 5-Year Capital Pian, review of prioritization criteria, and direction from the City Council. Tentatively, this would occur on January 20, 2015. 2. Development of a preliminary suggested prioritization list of Tidelands projects. 3. City Council review and approval of the prioritized list, as modified by the City Council, before the end of the first quarter of 2015.Strategy for the Tidelands Capital Budget and 5-Year Capital Plan December 31, 2014 Page 7 4, Revising of the FY 15 Tidelands Capital Budget to reflect those projects that have achieved full funding on the prioritized list 5. Review of Tidelands and Uplands operating budget and consideration of adjustments. {YOATALONG BEACH REVENUE TOELANDS LPLANDIIDELANOSITFF RE TOELANOS CAPITAL BUDGE! STRATEGY Vt WAL RELEASE VERSION) 00CX ATTACHMENTS ‘ATTACHMENT A: LIST OF PROJECTS THAT ARE INCOMPLETE OR HAVE NOT YET STARTED CONSTRUCTION ATTACHMENT B: PROPOSED PROJECT PRIORITIZATION CRITERIA cc: CHARLES PARKIN, CITY ATTORNEY Laura Douo, City AUDITOR ‘TOM Mooioa, ASSISTANT CITY MANAGER JYL MARDEN, ASSISTANT TO THE CITY MANAGER CHAIs GanNER, DIRECTOA, LONG BEACH GAS AND OIL GEORGE CHAPJIAN, DIRECTOR, PARKS, RECREATION AND MARINE ‘ARA MALOYAN, DIRECTOR, PUBLIC WORKS Mike DuREe, FiRE CHIEF LEA ERIKSEN, BUDGET MANAGER Eric Lopez, TIDELANOS CIP OFFicEA£40 1 o6e4 {GZINVOUOR 8H Aud LVNRHOS 984 YE Vode 0 (EUR) EZ UOIION.0) 26 un mEOE-EEZL SHODIG DED LOY 41.40 Kl “an BE ¥ GLORNE UO pew ; a onisy 96 1-2 Yoeae! eae § | coo'oer : YPe28 SOHHETY] souwery -suotsseou09 pue swoasey yoeaG| % % SFY HS] og ypeg sucis son 00'008 $} oo'00e $ | uorannsuog suotssaoue9 yeeoq sowueny] PINGRE fpe. suctssaaLeD woeeg somuery , Uiisoq Areunuoid pu cose 8s | oooce : wea 4026. 4095] — pug suassooueg poe seonet (od 00°00 —_$ | 000'000's s Pg ues We 0054] 00g yuowsea 207 Bunved yea cove. 8 | coo'coe $ | -poreudextdy Apms hres 0; Supun fog orpog ves 803 fons stenyearg| fo ; pareudordde jon Apmis Araseay ensasey vonesoisou Crecheelatertcenl hewheal 24 03 Supuny yensed se apiseiog| ‘fea oipeg ues 1863 ‘Annis soiemyeara| spaloig pouisseou oyuosin 40 Jeapinos wus $ 26a | aoiduscouy so anten $ woxe207 sieurauddy wey wor Vivewyseny syoafoig jeden spuejepit paonqgsuosun/aya}dwoou419700 ‘OaziNvOUOaH sh Aud aLYMUO HEL XsPeDEde: Jo (eUy) Cz UOHIen 20; 2A vLORERZL SELLE eIEED LOY AL Jo KdoD "RM BE ¥ SHORTEN UO PaIA 2209] eae |e : ‘#800 1893 008] uoquonuod ie obpua ueuisopad AeM apisees| oe 7 eee episy 18s seW29) Ore eH ee | OOO UENLE s 90 1593 00] uoquanuog 18 eBpug ueiaseped Aenn spiseas| : : tie 2199} ‘000'008's $ | 000'008's s ‘PAE 42990 1823 O08) Lonuaauog ye abpug UeUsopad hem apiseag| (paubisseeu og] ino sepurewe oun ‘Konis Aygayse0) 103 Aev0W 8s Anas Ajaisee pue| jody e149 201g UOUHR| o0'oss | oo0'0s: $ 1S umy we ozee| (pauBissseo1 99 pynoo| o00've9 $ | 000're9 $ 18 1018 3 665] 401904 1uOUNeR 105 peneDOREAL Yunowe ainu3) Nz ued B18, euNeW :swoonsey yeaa] 00'009 8 | 000'000 s WS1013 3668S] L-AN ued BISIA euneyy swoaysoy yoeag| (poutissess 2q pine noose $| ooo'ose 8 3S ope10109 "3 611s} 10 100g wouyeg 104 uonteooqeay O0O'OSES) '$-19 Wooe" opesojog swoonsay yeaa ‘000'009 8 | o00'008 8 ‘ena wnuenby 002] esnoyiysr soqeH moquiey :swoonsey yoe0g| ‘speloug poubjsseo% penusaiooun 40 [2a pinoo veus s 283 | veydwoour so onyen $ uonea07 ayeunrauday wen rolesLecobeg ‘GaZINVOMOY 167 AgrQLYERHO GOL, *EF Yoda! 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Number of California_residents impacted - The number of users of the projectifacility and/or the California residents impacted Uraeney - The urgency of the project; the extent to which there are adverse ramifications if project is not done in the near term, Poor Condition / High Need - The extent to which an existing facility is in poor repair or condition, or alternatively for a non-existing facility, the degree of unmet need. Quality of Life - The extent to which the project adds to the quality of life for California residents, in accordance with the Coastal Act, with a focus on local residents quality of life as well, Revenue Generation - The extent to which the facility will generate funds for the economy, Tidelands revenue, or other revenue. Operating expenses should be included in the evaluation. Ability to Attract Additional Funding - The extent to which partially funding this project from Tidelands funds will result in additional funding from non-City sources to support the project financing. ack of Altemative Funding Sources - The extent to which this project lacks the ability to be funded from another non-City sources such as an assessment, donations, grant dollars, fees for service, or other means. Capital Cost - A lower capital cost uses up less funding. The lower the net capital cost to Tidelands, the higher the score for this item The following methodology could be used or a different process could be directed by the City Council. For each project, staff will evaluate each criterion by assigning a score, and, for ease of interpretation, will lixely use colors to represent each score. Based on the overall scoring and the overall diversity and balance of the projects, the projects would be placed in a preliminary initial ranking. The City Council would review the recommendations (including the scoring) and then modify the prioritized list as the City Council believes is appropriate.